HOW DOES THE STRUCTURE OF FINANCIAL FLOWS AFFECT THE STABILITY OF THE BANKING SYSTEM?

ABSTRACT. Rochet constructs a model of the payment flows that allows him to capture in a simple fashion the propagation of financial crises in an environment where both liquidity shocks and solvency shocks affect financial intermediaries that fund long-term investments with demand deposits. Forbes maintains that banking crises are a serious concern and can be extremely costly. Landier and Ueda examine cases in which restructuring can bring economic gains. (pp. 144–148)